The main asset classes in which you can invest your pension savings

The main assets in which the Fund invests the money are equities, bonds and cash. These asset classes are available both in South Africa and offshore.

One cannot explain all the intricacies of these asset classes, but the following provides an overview.

Equities (or shares) 

When an investor owns the equity (or shares) of a company, he/she effectively owns part of that company. Equity prices are sometimes affected by market sentiment. Sometimes investors are negative towards the market and even if the company in which they have invested is doing well, it may still fall in value. 

Equities can be bought and sold on stock exchanges throughout the world. The South African stock exchange is called the Johannesburg Stock Exchange (JSE). The two main features of equities (compared to bonds and cash) are:

  • Historically, over the long term, equities have been the asset class that provided the highest investment return; and
  • Equities have had the highest volatility (or highest risk of reducing in value), especially over shorter measurement periods (less than 3 years).

This makes sense – logically investors should look to be rewarded by higher investment returns for taking on more risk.


The Government (and some large companies like Transnet, Telkom, ESKOM and SASOL) are regular borrowers of money. So, they issue bonds that invite investors (like the asset managers of your Retirement Fund) to lend them money. The bond will set out the interest the borrower will pay, and the date on which the loan will be repaid.

The market value (price) of a bond at any point in time depends on interest rates and, importantly, that price can decrease. By way of example, let’s say the Retirement Fund owns a bond that is worth R1 million, which is currently earning 8% per annum. If interest rates now increase to 10% per annum, the market value of the bond will fall because no investor will be prepared to pay R1 million to earn a 8% return when they now can earn 10% elsewhere!

The extent to which the price of a bond falls (rises) if interest rates rise (fall) depends on the period before the loan is repaid. If the repayment of the loan is a long way off, the investor will look for a much lower price because he/she needs to be compensated for the difference between 10% and 8% for a longer period.

Government bonds and other large corporate bonds can be bought and sold easily on the Bond Exchange of South Africa (BESA) and other world markets. 

Over the long term, bonds are expected to provide a lower investment return than equities, but a higher return than cash. Bonds are less volatile (or risky) than equities.

Cash and near cash investments 

Such an investment is like a bank savings account or a 30-day fixed deposit. Government bonds that have a term of less than 12 months before the loan is repaid are regarded as “near cash” investments. Such investments are also called “money-market instruments”.

Because such investments have a very short term (i.e. less than 12 months), they are much less affected by changes in interest rates than bonds and are the least risky of the three asset classes described above. 

Cash and “near cash” is expected to provide the lowest return of all the asset classes over the long-term.

It is important to emphasize that investing in cash is not entirely risk free. In certain market conditions the bank or institution where the money is invested may default. A recent example is African Bank Ltd, which was placed into curatorship in 2014. 

International investments 

Investments in equities, bonds and cash can be made either in South Africa or internationally. 

The main additional factors introduced by international investment are: -

  • The investor can be exposed to the companies that are the best in the world at their business. 
  • The South African equity market is very small (it represents less than 1% of the total world stock market capitalization). By investing internationally the Fund is exposed to a much wider opportunity set of investments.
  • The Fund is exposed to currency changes. Say, $1 currently costs R12 and the Fund invests R12 million in the USA (i.e. $1 million). If the Rand now “weakens” so that $1 now costs R14, the Fund will profit since its $1 million investment is now worth R14 million. Obviously if the Rand “strengthens” to say R5, then the Fund’s R12 million investments will reduce to R5 million and the Fund will make a loss.
  • There is different investment risk in different countries. For example, the US stock market has historically been less risky than the South African stock market.

It is important to highlight that the primary benefit from investing internationally is the diversification across different economies. Such diversification gives them greater protection should investment returns in South Africa be poor in relation to other economies. However, it is also important to note that every economy goes through “highs” and “lows”, and it will not always be true that it is better to invest in the developed economies.